China local debt reached $1.65 trillion in 2010

ChrisOliver

HONG KONG (MarketWatch) — China for the first time officially released the scale of debt held by local governments, in a move apparently intended to ease concerns about the scale of risks within the financial sector.

Local governments’ debts amounted to 10.72 trillion yuan ($1.65 trillion) by the end of last year, said Liu Jiayi, auditor-general of the National Audit Office, on Monday, according to a report by the Xinhua news agency.

Local governments are obliged to pay back 62.6% of the total figure, or about 6.71 trillion yuan, Liu was cited as saying on the Audit Office’s website.

About 21.8% of the sum, or 2.34 trillion yuan, is guaranteed by local governments, while 15.6%, or 1.67 trillion yuan, involves debt that the governments may be required to pay, according to Liu.

The Xinhua report cited Li Yang, vice president of the Chinese Academy of Social Sciences, as saying the disclosure will help ease concerns about risks to the financial system related to local-government debts.

“There are local-level risks, but these are not as serious as some people thought,” Li said.

The figure compares with estimates by the People’s Bank of China earlier this month that local-government financing vehicles accounted for about 30% of all yuan loans outstanding, or about 14 trillion yuan.

The Audit Office’s Liu was also cited as saying that China is considering allowing provincial governments and some cities to issue bonds directly.

“The size of debts is in the safe zone; however, the costs will be very high if local-level risks are triggered,” Xinhua cited Jian Kang, a research official at the Ministry of Finance, as saying.

In a related development on Monday, the National Audit Office said five commercial banks were found to have issued a total of 58 billion yuan of loans that violated regulations, according to newswire reports of Liu’s published comments, which didn’t specify the time frame for the loan issuance.

The figure is equal to about one-sixth of the new yuan loans that the five banks issued last year, Liu said in the report.

About 24.4 billion of the loans were secured without required approvals or were backed by insufficient capital, the auditor said. Other funds had been misappropriated, according to the auditor, without specifying a figure.

The auditor said Industrial & Commercial Bank of China Ltd. (1398) (601398) was among the five banks that had violated lending rules but didn’t identify the other lenders.

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